The Supreme Court made a significant observation regarding the responsibility of an auction purchaser towards the property purchased. The Court pointed out that an Official Liquidator could not guarantee or warrant the condition of the sold property. Therefore, it was the purchaser's responsibility to conduct a thorough investigation of the title and encumbrances of the property.
Brief Facts in the Case:
The appellant, who was the Official Liquidator of IISCO Ujjain Pipe and Foundry Company Limited (hereinafter referred to as "OL IISCO"), filed Civil Appeal against the impugned judgment and order passed by the Company Judge of the High Court allowing the company applications made by Ujjain Nagar Palika Nigam for property tax and water tax.
The Division Bench of the High Court at Calcutta had dismissed the appeals against the judgment and order. The company in question was in liquidation. The taxes were claimed from the appellant from the date of the winding-up order until the date of confirmation of the sale of assets to the auction purchaser, now represented by respondent no 3.
Brief Background of the Case:
IISCO Ujjain Pipe and Foundry Company Limited became sick. They were referred to the Board for Industrial and Financial Reconstruction (hereinafter referred to as "BIFR") under the Sick Industrial Companies (Special Provisions) Act, 1956 (hereinafter referred to as "SICA"). The BIFR recommended the winding up of the company, which was ordered by the Company Court in 1997.
The appellant was appointed as the Official Liquidator and was directed to take over possession of the company's assets. In 2003, the company's assets were put up for sale on an "as is where is whatever there is" basis and were subsequently sold to Nagendra Jain for Rs. 20.50 crore, which the Company Court confirmed. After the sale of assets, the appellant invited claims from the creditors of the company in liquidation. Respondent No. 1 Nigam filed claims for property tax and water tax arrears, which were partially rejected by the appellant on the ground that they arose after the date of winding up. In response, Nigam filed two company applications before the Company Court in Calcutta, challenging the admissibility of post-liquidation claims.
Contentions of the Appellants:
The appellants argued they could not be held responsible for post-liquidation claims without considering pre-liquidation creditors. They claimed that the appellant had admitted the pre-liquidation claims and had rightfully rejected the post-liquidation claims according to Section 530 of the Companies Act, 1956. The appellant did not carry on any business or use water to gain a profit after the company's liquidation. The lawyer contended that the High Court was wrong to prioritise post-liquidation liabilities over all other penalties, which would harm pre-liquidation creditors.
Respondent No. 1 had not taken the necessary legal steps to realise their dues, as claimed in their affidavit of proof of debt, and the High Court did not even consider the affidavit before holding the appellant liable for post-liquidation claims. The benefit given to respondent No. 3 by the High Court should not have been given in view of the terms and conditions of the sale of the company's assets in liquidation.
The purchaser would be deemed to have full knowledge of the defects, encumbrances, and statutory dues before purchasing the assets and properties of the company in liquidation. The lawyer argued that the appellant is not entitled to make any claim regarding a diminution in the price on the ground of defects in the title or description of the property.
The submissions made on behalf of the appellant were supported by respondent No. 2, Steel Authority of India Limited, who argued that the findings of the High Court were not in accord with the law on the point pertaining to ouster clauses in the sale notice.
Contentions of the Respondents:
Learned counsel for respondent No.1 argued that as the custodian of the property, the appellant OL IISCO was liable to pay the post-liquidation claim as raised by Nigam, which constituted "liquidation expenses". The expenses incurred by the OL IISCO for "preserving, realising or getting in" the assets of the company were required to be paid in priority as per Rule 338 of the Companies (Court) Rules, 1959 (hereinafter referred to as "Rules, 1959"), which provides for the order of preference for costs and expenses payable out of the assets of the company.
Furthermore, learned counsel for respondent No. 1 argued that Section 185 of the Madhya Pradesh Municipal Corporation Act, 1956 (hereinafter referred to as "MP MCA") creates an obligation to pay municipal taxes as a first charge on the land and building and the movable properties. The proviso expressly provides that arrears of taxation are not recoverable from any occupier who is not the owner if the arrears are of the period when such occupier was not in occupation. Therefore, arrears of tax for the period before confirmation of the auction sale cannot be recovered from the auction purchaser and have to be paid by the OL IISCO.
On the other hand, learned counsel for respondent No. 3 argued that the tax dues in the present case were "post-liquidation dues" amounting to "costs of liquidation" and were to be borne by the OL IISCO alone; and could not have been foisted on the auction purchaser. It was submitted that the Companies Act, 1956 and the Rules, 1959, do not impose any obligation on the purchaser to pay dues that relate to the period between the date of the winding-up order and the date of sale confirmation.
Respondent No. 3 referred to Section 100 of the Transfer of Property Act, 1882 and the previous decisions of the Court to argue that the auction purchaser could not be made liable for such arrears of tax without notice and in the absence of any provision in terms of sale or any statutory provision. No charge could be enforced against any property in the hands of the transferee for value without notice of the charge. For its enforceability, a provision of law must expressly provide for enforcement of a charge against the property in the hands of the transferee for value without notice to the charge and not merely create a charge.
Observations of the Court:
The Court had to determine the impact of the sale of a company's assets in liquidation to a respondent who purchased it on an "as is where is whatever there is" basis. The Court closely examined the decisions cited by both parties to understand the principles applied to each. The Court ruled that if the intending purchaser had not been warned to satisfy themselves about encumbrances, such an obligation could not be imposed on them.
The Supreme Court analysed multiple previous decisions to ascertain the responsibility of an auction purchaser towards the property bought. The first case was Haryana Financial Corporation v. Rajesh Gupta [(2010) 1 SCC 655], which distinguishes between corporation sales and official Liquidator sales. The Court observed that an OL IISCO would not hold any guarantee or warranty regarding the property sold. The purchaser was responsible for satisfying himself in all respects regarding the title and encumbrances. of the property. The second case, UT Chandigarh Administration and Anr. v. Amerjeet Singh and Ors. [(2009) 4 SCC 660] dealt with consumer complaints regarding basic amenities in a property auctioned on an "as is where is" basis. The Court ruled that the purchaser was not a consumer with reference to the public auction of existing sites, and therefore, the complaints had no relevance to the case. The third case, Punjab Urban Planning and Development Authority v. Raghu Nath Gupta [(2012) 8 SCC 197], discussed the liability of an auction purchaser towards arrears of tax due on the property sold. The Court held that an auction purchaser, without notice of any charge, could not be made liable for such dues in the absence of stipulation in the terms of sale or any statutory provision.
Finally, the Court held that the principles discussed in the earlier cases operated against the appellant's claim, and the auction purchaser, without notice of any charge, could not be made liable for the tax arrears during the post-liquidation period.
In reference to Rule 338 of the Rules, 1959, it was concluded by the Court that in the circumstances of the case, property tax and water tax arrears up until the confirmation of sale qualified as expenses for "preserving, realizing or getting in" the company's assets, and thus, had to be paid in priority by the appellant OL IISCO.
The decision of the Court:
The Supreme Court accepted the reasoning of the High Court in this regard. The sale notice in the present case was found to be ambiguous and with omissions in its terms and conditions; therefore, the Apex Court did not interfere with the High Court's decision. Consequently, the Supreme Court upheld the decision of the High Court and dismissed the appeals.
Case Title: Official Liquidator v Ujjain Nagar Palika Nigam & Ors.
Case No.: Civil Appeal No. 8015 of 2010
Citation: 2023 Latest Caselaw 447 SC
Coram: Hon’ble Mr. Justice Dinesh Maheshwari and Hon’ble Mr. Justice Aniruddha Bose
Advocates for Petitioner: Mrs. Rupali Samanta Ghosh, AOR and Mr. Sanjay Kumar Ghosh, Adv.
Advocates for Respondent: Ms. Christi Jain, Adv., Mr. Puneet Jain, Adv., Mr. Harshit Khanduja, Adv., Mr. Yogit Kamat, Adv., Mr. M. Arora, Adv., Ms. Pratibha Jain, AOR, Mr. Sunil Roy, AOR, Mr. T. Srinivasa Murthy, Adv., Mr. P. N. Gupta, AOR, Mrs. Bharti Gupta, Adv.
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